Monthly Archives: January 2010

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Recently, the World Economic Forum released its “Global Risks 2010” report, in which partners, including Swiss Re and other corporate and academic entities, collaborated to analyze the most serious global risks for the current year. This was the one of several posts we have run recently about the biggest risks ahead for 2010, whether economic, political or otherwise. One thing that we see through all of them is the word “China.” It will be interesting to keep an eye on this prediction and whether the country will hinder or help the U.S. in 2010.

To discuss this and the rest of the year ahead, I was fortunate enough to touch base with Kurt Karl, chief U.S. economist at Swiss Re, to get his take on this year’s report.

In your opinion, what is the biggest global risk facing the U.S. for 2010 and why?

Kurt Karl: The biggest global risk facing the U.S., as the “Global Risk 2010” report points out, is renewed asset price collapse. This would essentially be a global double-dip recession. With very high deficits and very low interest rates, another recession would be very difficult to combat. A return to recession could come from continued employment declines eroding consumer confidence, another banking sector scare or possibly a mutation in the pandemic virus which increases the fatalities causing consumers to panic and stop traveling and reduce shopping.

How will underinvestment in infrastructure (especially agriculture) affect the U.S. economy in the long run?

Karl: Infrastructure is essential for long-term growth and there is some evidence that the U.S. has been under-investing in infrastructure. Not only could this lead to catastrophes, such as the Minneapolis bridge collapse, but it would reduce economic growth by creating bottlenecks in, for example, the transportation system. The key risk for the agricultural sector is infrastructure that supports water supplies. This is partly an investment issue and increasingly a political issue. Reduced agricultural production will harm the US trade deficit — we export a lot of agricultural products — increase inflation and reduce standards of living.

What is the biggest, long-term international risk you see? And how will that affect the U.S.?

Karl: China, which is growing rapidly, is the biggest risk and the biggest opportunity for the U.S. economy. The global economy is increasingly dependent upon the health of the Chinese economy. At the same time, China needs to become a more open economy, with — ultimately — a floating exchange rate and free trade practices where it and other countries are competing on a level playing field.

What do you see as the biggest factor that could possibly prevent a complete economic recovery?

Karl: The biggest risk is global employment growth. If confidence turns sufficiently negative, companies will start cutting jobs again and that would kill the recovery.

The biggest global risk facing the US, as the Global Risk 2010 report points out, is renewed asset price collapse. This would essentially be a global double-dip recession. With very high deficits and very low interest rates, another recession would be very difficult to combat. A return to recession could come from continued employment declines eroding consumer confidence, another banking sector scare or possibly a mutation in the pandemic virus which increases the fatalities causing consumers to panic and stop traveling and reduce shopping.

2. How will underinvestment in infrastructure (especially agriculture) affect the US economy in the long run?

Infrastructure is essential for long-term growth and there is some evidence that the US has been under-investing in infrastructure. Not only could this lead to catastrophes, such as the Minneapolis bridge collapse, but it would reduce economic growth by creating bottlenecks in, for example, the transportation system. The key risk for the agricultural sector is infrastructure that supports water supplies. This is partly an investment issue and increasingly a political issue. Reduced agricultural production will harm the US trade deficit — we export a lot of agricultural products — increase inflation and reduce standards of living.

3. What is the biggest, long-term international risk you see? And how will that affect the US?

China, which is growing rapidly, is the biggest risk and the biggest opportunity for the US economy. The global economy is increasingly dependent upon the health of the Chinese economy. At the same time, China needs to become a more open economy, with — ultimately — a floating exchange rate and free trade practices where it and other countries competing on a level playing field.

4. What do you see as the biggest factor that could possibly prevent a complete economic recovery?

The biggest risk is global employment growth. If confidence turns sufficiently negative, companies will start cutting jobs again and that would kill the recovery.1. In your opinion, what is the biggest global risk facing the U.S. for 2010 and why?

The biggest global risk facing the US, as the Global Risk 2010 report points out, is renewed asset price collapse. This would essentially be a global double-dip recession. With very high deficits and very low interest rates, another recession would be very difficult to combat. A return to recession could come from continued employment declines eroding consumer confidence, another banking sector scare or possibly a mutation in the pandemic virus which increases the fatalities causing consumers to panic and stop traveling and reduce shopping.

2. How will underinvestment in infrastructure (especially agriculture) affect the US economy in the long run?

Infrastructure is essential for long-term growth and there is some evidence that the US has been under-investing in infrastructure. Not only could this lead to catastrophes, such as the Minneapolis bridge collapse, but it would reduce economic growth by creating bottlenecks in, for example, the transportation system. The key risk for the agricultural sector is infrastructure that supports water supplies. This is partly an investment issue and increasingly a political issue. Reduced agricultural production will harm the US trade deficit — we export a lot of agricultural products — increase inflation and reduce standards of living.

3. What is the biggest, long-term international risk you see? And how will that affect the US?

China, which is growing rapidly, is the biggest risk and the biggest opportunity for the US economy. The global economy is increasingly dependent upon the health of the Chinese economy. At the same time, China needs to become a more open economy, with — ultimately — a floating exchange rate and free trade practices where it and other countries competing on a level playing field.

4. What do you see as the biggest factor that could possibly prevent a complete economic recovery?

The biggest risk is global employment growth. If confidence turns sufficiently negative, companies will start cutting jobs again and that would kill the recovery.

In a move that will undoubtedly make America’s roads a safer place, Transportation Secretary Ray LaHood issued a full ban on texting while driving any bus or truck. The ban, effective immediately, states that truck and bus drivers who text while driving commercial vehicles may be subject to civil or criminal penalties of up to $2,750. As the Department of Transportation notice states:

During the September 2009 Distracted Driving Summit, the Secretary announced the Department’s plan to pursue this regulatory action, as well as rulemakings to reduce the risks posed by distracted driving. President Obama also signed an Executive Order directing federal employees not to engage in text messaging while driving government-owned vehicles or with government-owned equipment. Federal employees were required to comply with the ban starting on December 30, 2009.

Texting while driving any vehicle has caused numerous accidents, many of them fatal. Though the exact number of accidents caused by this distraction is not know, numbers are suspected to be high. Back in November, we ran a story on the dangers of texting while driving. At that time, 17 states had banned texting while driving. Now, that number stands at 19. For a complete breakdown of the states that have enforced rules on the use of cell phones while driving, the Governors Highway Safety Association offers the following table:

Munich Re was very happy to recently announce that billionaire Warren Buffett has invested even more money in the company. He now holds a 3.045% stake in the company and news of the investment boosted share price by 2%.

In early 2008, Buffett’s investment company, Berkshire Hathaway, bought a 3% stake in Swiss Re. During the U.S. subprime crisis, the company helped rescue Swiss Re from financial trouble with a major loan, helping to strengthen the reinsurance company’s balance sheet.

Berkshire Hathaway itself has reinsurance operations, Berkshire Hathaway Re, which is among the largest three reinsurers worldwide by gross premium income. Buffett has repeatedly said in the past that he isn’t eyeing a takeover of the Swiss company. However, during the past two years, Swiss Re and Berkshire have entered several reinsurance deals, raising speculation that the two firms could merge at some point.

Buffett is no stranger to the reinsurance market. Berkshire Hathaway owns Berkshire Hathaway Re, one of the largest three reinsurers worldwide in terms of gross premium income. Berkshire also owns various other insurance companies, including GEICO, which it acquired in 1996, General Re, which it acquired in 1998, NRG (Nederlandse Reassurantie Groep), which it bought in 2007 and Berkshire Hathaway Assurance, a government bond issuance company.

It’s a dangerous world for business people, and it is well known that some areas of the world are definitely more dangerous than others. Maplecroft, a risk intelligence organization, has released its analysis of the 175 most dangerous countries for business. Its Global Risks Index (GRI) measures a combination of different risks that have an impact on global operations, supply chains and distribution networks of corporations. The GRI takes into account the following risks:

Terrorism

Conflict

Macroeconomic Risks

Rule of Law

Resource Security

Vulnerability to climate change

Natural Disasters

Human rights violations

Poverty

Risks from pandemics and infectious diseases

Without much surprise, Africa takes the cake for being home to the most dangerous countries in which to do business. The top four are:

Somalia

DR Congo

Zimbabwe

Sudan

Other notably dangerous countries include Afghanistan, Nigeria, Iraq, Bangladesh, Pakistan and Yemen. The report pointed to the most dangerous countries’ weak governance, internal conflicts and regional instability among the reasons It’s also important to note that “several of these countries, including DR Congo, Nigeria, Iraq and Pakistan, are owners of huge oil, gas and mineral reserves, which form important links in the supply chains of western and BRIC companies alike.” The following map indicates regions of risk from low to extreme:

The report also mentions countries that, although not highly ranked as dangerous, are critical to supply chains. Those countries include the Philippines, Indonesia and India. The United States, Canada and Australia remain low risk.

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